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Private Equity Has $45 Billion War Chest For Hotel Deals

Lodging Transactions Volume Should Hold Steady in 2013, Says Jones Lang LaSalle

Private equity investors will be lead the way in hotel dealmaking in 2013 and beyond. According to real estate advisory and research firm Jones Lang LaSalle, private equity firms have a combined $45 billion in purchasing power they could unleash to acquire lodging properties. Their likely targets, says JLL, will be investments that carry value-add opportunities, while REITs, expected to be the second most active class of hotel buyers, look for high-quality branded assets in strong urban markets.

These were some of the forecasts from JLL during a media conference call yesterday to preview investment trends in all classes of commercial real estate.

According to Lauro Ferroni, JLL’s head of hotel research, the overall strength of hotel performance is the key factor driving investor interest in the sector. He forecasts RevPAR growth between 4% and 6% in 2013.

“Clearly, the hotel real estate sector has continued to gain strength, and demand growth is one of the key factors underpinning the healthy transactions market,” said Ferroni. “Lodging demand is up about 3% and that’s driven by more business travel, more conventions and more international tourism arrivals.”

Ferroni sees winners and laggers in demand growth. Due in large part to near-record levels of international travel to the U.S., the key gateway cities—Boston, Los Angeles, New York, San Francisco, Miami—should lead the industry in demand increases. And not surprisingly, these same markets should be most active for hotel transactions. JLL says $2.5 billion worth of lodging properties in New York will change hands this year.

Markets that have had higher levels of new hotel supply in recent years—Atlanta, Dallas, Phoenix, Tampa and Orlando—will trail in demand growth. The wild card market, said Ferroni, is Washington, DC.

“The city’s hotels lagged in performance in 2012 but that’s typical for an election year,” he said. “Business should pick up next year because of the inauguration and as more public and private groups travel to the city to strengthen their ties to the administration.”

According to the JLL forecast, U.S. hotel transactions volume should top $15 billion this year, about even with the 2011 volume. “The market for hotel deals and the pace of transactions in 2013 will mirror the second half of this year, which has been more active than the first part of the year.”

Of course, transactions require capital, and Ferroni sees a “gradual reemergence of debt for hotel acquisitions” from a diverse group of sources: commercial banks, both domestic and offshore; insurance companies; CMBS debt funds; and mortgage REITs.

“Debt levels [in the hotel sector] are at the highest level since 2007, implying an ongoing recovery in the debt market,” he said. “And while lenders continue to be selective in terms of asset types and locations, the overall trend will be positive.”

While Jones Lang LaSalle is bullish on hotels, it’s a little more guarded in its forecast for the overall economy and for other commercial real estate sectors. The culprit is uncertainty over the looming fiscal cliff, long-term national debt and the lingering Euro crisis.

“The election didn’t take away all of the uncertainty,” said Ben Breslau, director of Americas research for JLL. “We need consensus and action out of Washington in order to change what has been a lukewarm recovery.”

He was hopeful the uncertainty somehow clears. If so, Breslau said economic growth could accelerate by late 2013 and into 2014.

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